The Alberta Securities Commission refused to invoke its public interest jurisdiction to terminate a soliciting dealer arrangement to solicit favourable votes during a proxy contest. REUTERS/Fred Prouser
WHILE THE REGULATORY green light has started to glow on soliciting dealer fees following the Alberta Securities Commission’s (ASC’s) recent decision in Re PointNorth Capital, target practice will almost certainly continue.
In June, the ASC refused to invoke its public interest jurisdiction to terminate a soliciting dealer arrangement used by Liquor Stores N.A. Ltd., a TSX-listed company, to solicit favourable votes during a proxy contest.
The decision is the first in Canada to deal with such arrangements in the context of proxy contests and the first to uphold them. In doing so, the ASC specifically rejected the argument that soliciting dealer arrangements are inherently abusive of investors or the capital markets.
“The ASC could have concluded that the one-sided dealer fee that existed in this case was inherently abusive,” says Chris Sunstrum of Goodmans LLP in Toronto. “Instead, it refused to do so in the absence of evidence that individual investors had been abused.”
Soliciting dealer fees are not new to Canada. Parties use them to help achieve voting thresholds in M&A transactions and proxy contexts by arranging “soliciting dealer” groups who are usually compensated for every favourable share they solicit. Acquirers, targets and incumbent management have all resorted to them, although so far no dissidents in proxy contests have done so.
According to a client bulletin from Calgary’s Burnet, Duckworth & Palmer LLP, which successfully represented Liquor Stores, the arrangement have been used at least 43 times in M&A transactions and three times in proxy contests. It first attracted widespread public attention when agricultural retail supplier Agrium Inc. resorted to them during its proxy fight with Jana Partners, which culminated in victory for the company in 2013.
Going forward, however, PointNorth may not provide a green light for such arrangements. “The ASC did not go so far as to sanction the use of dealer fees,” Sunstrum says. “All it said was that there was not enough evidence to support the invocation of the public interest jurisdiction in this particular case.”
Alberta, like the rest of Canada, does not prohibit soliciting dealer arrangements. Absent conduct that breaches securities law, applicants who seek relief based on the public interest jurisdiction must demonstrate conduct that is “clearly abusive” of investors or the integrity of the capital markets. In the ASC’s view, the record put forth by PointNorth in challenging Liquor Stores’ arrangement did not meet that standard.
“Part of the issue with adjudicating on the basis of the public interest jurisdiction is the burden that applicants must bear,” Sunstrum says. “And where there has been no technical breach of securities law, that burden is an onerous one.”
In 2017, PointNorth, which had a substantial stake in Liquor Stores, sought control of the company’s board by way of a proxy contest. During that contest, Liquor Stores initiated a soliciting dealer arrangement as a way of communicating with retail shareholders who had declined to provide their contact information to the company and could only be contacted by their brokers. The arrangement provided that brokers would receive compensation for proxies voted in favour of directors nominated by management. PointNorth argued that the arrangement created a conflict that improperly influenced brokers in the advice they gave clients and amounted to nothing less than buying votes.
But the ASC noted that Canadian regulators have not prohibited the use of soliciting dealer arrangements. “If and until they do, this whole question is going to be a challenging one,” Sunstrum says.
Indeed, whether Canadian authorities will ever follow the US lead and implement a “best interests” rule that creates a fiduciary duty from brokers to their clients is a dubious proposition at best. “Ontario and the Atlantic provinces are the only jurisdictions still pushing for a best interests rule, so real skepticism exists about whether it will ever come to fruition.”
Absent regulatory guidance, it’s not at all clear that other regulators will follow Alberta’s lead. “The ASC has on a few occasions demonstrated that it is less inclined to intervene by way of the public interest jurisdiction than other regulators, like the Bureau [Autorité des marchés financiers] in Quebec,” says Sunstrum.
Still, Burnet Duckworth’s Bill Maslechko says PointNorth may not even be the last word from Alberta.
“There’s a whole regime to manage in the context of this issue,” Maslechko says. “All PointNorth says is that the ASC didn’t think it was appropriate to weigh in on that regime in this one-off situation.”